Key Issues in China’s Tax Reform.doc

Key Issues in China’s Tax Reform TAX reform is one of the most widely discussed issues in China. In this respect， it is far from being unique！ In the U.S.， disputes over health care payments and taxation of better-off citizens underlined last year’s government shutdown. The question of who will pay the tax increases that are inevitable in China as it begins to build more comprehensive health care and social security systems will be key not only to its economic development， but also to its future social stability. In all countries， including China， economic strategy must determine the direction of effective tax reform. Attempts to analyze tax reform without situating this within overall economic dynamics necessarily result in discussions and policies that are ambiguous and ineffectual， and risks that create social instability. The links between tax reform， economic development and social stability are precise. Clearly， taxes are not a goal in themselves but merely the means to fi nance government expenditure. China must， therefore， face the fundamental reality that as it makes the transition from a “developing economy” to its current goal of a “moderately prosperous”society， and eventually to a “high income” economy， the proportion of government spending in GDP will increase. As government spending must eventually be fi nanced via taxes， this means taxation in China will also have to increase. Who pays these taxes will， therefore， greatly affect social stability. So for tax reform to be effective， discussions of short- and medium-term measures must be integrated into this longer-term perspective. The issue may indeed be stated bluntly： If the struggle against corruption is today at the forefront of discussions on China’s social stability， in the medium term， the type of tax system created will be equally decisive. To take the most fundamental starting point， the chart below shows why increases in taxation are inevitable in China as it becomes a more devel